Bank of England rate maker sets out gloomy economic forecast | Business

Bank of England rate maker sets out gloomy economic forecast | Business


Britain risks a long period of low growth and high unemployment as the economy stutters back to life, a Bank of England policymaker has warned.

Michael Saunders, a member of the Bank’s monetary policy committee, said the “searing experience” of the coronavirus crisis wou leave its mark long after the lockdown was lifted and the central bank should risk pumping too much stimulus into economy rather than too little to combat a severe downturn.

Saunders, who was one of only two members of the nine-strong MPC this month to back an increase in the stimulus programme, said he thought the economy was on course to suffer more long-term damage from the pandemic than the Bank said in its most recent assessment.

An acceleration in the already high rate of unemployment and an increase in the number of companies going bust would leave long-term scars on badly affected industries while the threat of a resurgence in Covid-19 cases was likely to weigh on business and consumer confidence, he said in a speech delivered online on Thursday.

Setting out a gloomy prognosis for the economy, he warned that banks could become wary of lending to companies while businesses, nervous about the prospects for the economy, pulled back from making investment decisions, leaving the GDP growth to stagnate.

“If unchecked, there are risks of a vicious circle, whereby the economy gets stuck in a self-feeding loop of weak activity, pessimistic expectations and low investment,” Saunders said.

Earlier this week the Bank’s chief economist Andy Haldane said the early signs of returning to previous levels of output, but could take longer to recover than first estimated.

The Bank cut interest rates to a record low 0.1% and injected a further £200bn into the economy, taking its stimulus programme to £645bn.

Many City analysts expect the central bank to take further steps at its meeting next month to cut the cost of borrowing.

“It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut,” Saunders said.

Dismissing concerns that a spending splurge by the central bank could ignite a spike in inflation, he said the evidence was of heavy price cutting and squeezed margins across most commercial sectors and the more likely prospect was for inflation to fall close to zero by the end of the year.

“The risk of inflation picking up is negligible,” he said, adding that a fall in the demand for credit would reduce the demand for goods and services, further easing the pressure on prices.

“The desire to self-insure is likely to lead to businesses and households having a lower risk appetite in a post-Covid environment,” he said, leading to higher rates of household savings and moves by companies to pay down debts.



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